Tuesday, March 25, 2014

My thanks to Carola, Berkeley economics PhD student and excellent blogger. The post tackles one of the biggest issues of the day, Will the explosion in computer/robot/machine ability result in mass unemployment this time, even though previous technological revolutions haven't? I make use of insights from MIT professors Brynjolfsson and McAfee's important new book, as well as their first book on this subject, Race with the Machine.

Sunday, March 16, 2014

Some people seem to think that something like Spain’s slight recovery this year — the best estimates now are that it may grow 1.5 percent — are as big a failure for the critics of austerity as the kind of thing I show above is a failure of the finance canon. But lots of stuff can cause the economy to grow a percentage point or two more or less than your forecast.

I'll add that also current absolute level, of course, matters, not just growth. If your economy gratuitously shrinks by 15% over four years because you chose austerity, then it grows 1.5%, it's still at least 13.5% smaller than it was, and could have been. Especially with an unemployment rate of 25%, that's a horror, not reason to claim victory and vindication.

If, as an investor, you lose 90% of your family's life savings, then you get a 1.5% return, do you say, Yea! See, my strategy was right! Or do you say that if I had followed a smart strategy I'd be at 110% of where I started, not at 10.15% of where I started -- and claiming victory and vindication.

Sunday, March 2, 2014

Cornell professor of government Suzanne Mettler has a great New York Times article on the horror of for-profit colleges. I urge everyone to read it. These predators do tremendous harm to our young and our country, and of course they should at least be severely regulated. In fact, the problem may be so profound, the asymmetric and poor information so bad, and they may be so hard and expensive to regulate, that it may be best to require all colleges to be (true) non-profits or government. But want I want to focus on in this post is another problem that's also very important, and rarely noted, the private student loans heavily used by these companies.

This is the big flaw in Mettler's otherwise excellent article. She writes, "Nearly all of their students take out loans to attend, and the amounts are staggering.", but never notes the crucial point that these student loans are much more likely to be private than with government colleges. This is just enormously important. And sadly almost everyone misses this, a tragic flaw of our system, and of a very dominant paradigm of writing that overly stresses smoothness, brevity, and simplicity over accuracy, non-misleading, and not leaving out very or crucially important detail and specificity.

Because of the 2005 BAPCPA bankruptcy law private student loans are never escapable in bankruptcy, with extremely rare exception -- something like you now have full body paralysis. And these loans are usually for large amounts, often at very high interest rates. I've heard as high as 19%, where due to the awesome power of compound interest at a high rate, debt grows 5.7 fold every decade!

These unsuspecting young people are at serious risk of being made into lifetime indentured servants with no escape ever (other than trying as best they can to avoid wage garnishment and seizing of any substantial assets they will ever achieve in life by things like moving to one of the states that restricts this the most). This is their reward for doing the right thing, trying to improve their education and skills to become more productive citizens. Yet the Republican response is good! More prey for the plutocrats to feed off!

Federal government student loans, by contrast, are a completely different story. They also cannot be escaped in bankruptcy, but they have powerful income based repayment and loan forgiveness protections that make them completely safe, in fact one of the safest major loans in history. For example, the vast majority of federal student loans today qualify for a program called Pay-as-you-Earn. Under this program the most your payments can ever be is 10% of your family's discretionary income (which is usually much less than total income). And it's very progressive, so it's usually much less than 10%, and can easily be zero. Yet after 20 years of payments (including when the payment drops to zero), no matter how much you still might owe, the balance is 100% forgiven. And there are programs even much better than that if the student takes a job that's defined as "public service". For more, see this article I did with the help of student loan expert, advocate, and attorney Heather Jarvis.

So it's huge that with for-profit schools the loans are much more private, and this – and the reasons why it's important – should always be noted, but rarely are.

"Richard Serlin, who has made himself one of the world’s experts on Neil Wallace’s original paper, was good enough to agree to write a guest post..." – Miles Kimball, University of Michigan economist, and one of the founders of New Keynesian Economics

"Richard Serlin (HT Mark Thoma) gives the bottom line intuition of Wallace neutrality... " – Bruegal blog, EU economics think tank, considered one of the best in the world

About Me

I am an adjunct professor for the University of Arizona where I teach one of the largest personal finance courses in the country, with over 500 students per year. I hold an MBA from the University of Michigan and have completed all coursework and written exams for a Ph.D. in finance from the University of Arizona. I am also president and co-founder of Summit Personal Finance Education, one of the country's largest U.S. Trustees approved providers of a personal finance course, designed by myself, which meets the requirements for bankruptcy filers under the BAPCPA law of 2005.

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Policy Note

I edit and improve most of my posts after I initially place them. I will not hesitate to do this, and without cross-outs, as my main goal is to teach and discuss clearly and well, to help with understanding and good idea creation, not to leave a historically accurate evolution of my writing. In fact, if you think the writing of a post has clunky spots or mistakes, you might want to try looking at it hours or days later. These things may be fixed, plus valuable new material may have been added. My writing really tends to improve with seasoning.

I will, however, note if I have made a major change of opinion, or corrected an important mistake of fact that could be substantially harmful to a person or party. This is subject to interpretation, however. For example, if the post was up for two minutes before I fixed it, I may not write a correction note. Unless my blog traffic greatly increases, it's unlikely many people, or any people, saw it.